Washington is staring down another debt limit crisis. This could become a constructive opportunity for reform if lawmakers dispense with the gimmicks and default threats.
As a fiscal conservative who has spent two decades in Washington fighting both parties on deficits, I sympathize with Republicans using the debt limit to address the underlying deficits because such an approach used to be bipartisan. Since 1985, the eight largest deficit-reduction laws — such as the 1990 George H.W. Bush tax hikes, 1997 Balanced Budget Act, and 2009 Pay-As-You-Go law — were all attached to debt limit increases. Every one of them.
I’m also sympathetic because entitlement spending — 70 percent of the budget that includes Social Security, Medicare, Medicaid, and farm subsidies — has been removed from the annual budget process, allowing it to grow rapidly on autopilot without congressional votes. This leaves the debt limit as the only vote addressing the entire budget. The debt limit should be replaced with a new system that allows the full budget to be voted on as a whole — with all tax and spending priorities competing against each other.
So while I support aggressive deficit reduction, I do not agree with some fellow conservatives who are taking the debt limit hostage and threatening to not raise it.
Failing to raise the debt limit would be catastrophic. Washington would be forced to immediately balance the budget by eliminating 20 percent of all spending. Even if lawmakers could protect Social Security, Medicare, Medicaid, defense, veterans’ benefits, and interest on the debt (which together comprise 70 percent of the budget), they would have to immediately eliminate two-thirds of all remaining spending from programs such as food stamps, child nutrition, disability benefits, and homeland security. Alternatively, defaulting on the debt itself — by missing interest payments and failing to redeem bonds at maturity — could roil financial markets, destabilize bank balance sheets, and spike interest rates with cascading effects across the economy.
Enter “prioritization.” The idea, popular among Republicans, is to pass legislation mandating that Washington, after hitting the debt limit, would first pay interest on the debt, Social Security, military salaries, and possibly Medicare and veterans’ health benefits. Tax revenues would probably be sufficient to finance these programs (and perhaps half of remaining federal programs). Nevertheless, I studied prioritization as then-Senator Rob Portman’s chief economist during the 2011 debt limit crisis and found it unworkable and unwise.
The first barrier is the Treasury and Federal Reserve computers that receive millions of payment invoices weekly and are probably not technically capable of categorizing which ones to pay or ignore. Interest payments on the debt could possibly be separated out, but all other payments are programmed to be made sequentially and these systems cannot easily be reprogrammed. Instead, each day’s invoices would probably be paid until the day’s tax revenue runs out. Better hope your Social Security check is printed in the morning.
Even if it were technically feasible, prioritization defaults on countless American businesses that sell goods and services to Washington. The federal government purchases military equipment from defense contractors and office supplies from small businesses. It reimburses medical providers for the cost of seeing Medicare- and Medicaid-covered patients. It contracts with construction companies to build roads. The debt limit risks defaulting on legally obligated payments for goods and services that have already been contracted and even delivered. Washington would be defrauding millions of businesses and endangering their ability to pay their own employees and make their rent payments. Businesses could go bankrupt and millions of unpaid workers could be furloughed or laid off, initiating a dangerous economic spiral.
Furthermore, every person, entity, or local government denied obligated federal funds could sue the federal government. Under the Prompt Payment Act, Washington would have to repay each of these entities plus 4.625 percent interest and legal fees. Federal spending would ultimately rise.
Prioritization would not fool the bond market. Making your credit card payment will not save your credit rating if it means skipping your mortgage and car payment. The bond market would see a federal government in financial chaos and likely begin disinvesting in Treasuries, which is the very outcome prioritization is meant to avoid.
Finally, prioritization is simply tone-deaf politics. Lawmakers will be slammed for paying Chinese bondholders before your kids’ school lunches or your brother’s veterans’ pension. Advocates of every spending program that misses the cut will pound on these lawmakers’ doors demanding an explanation.
Republican threats of default and prioritization dominate headlines, scare voters, and shift the message away from the Democrats’ refusal to come to the table and begin building a bipartisan deficit reduction plan. As deficits soar well past $2 trillion within a decade (even as the 2017 tax cuts are set to expire in 2025), and Social Security and Medicare head toward insolvency, restraining spending and deficits should be seen as sober, prudent, and common sense. Instead, threats of default appear chaotic, destabilizing, and scary.
The debt limit is a hostage that cannot be shot, and prioritization is unworkable. Fiscal conservatives should pledge to hike the debt limit and then shift the public’s focus to bringing both parties together to address soaring deficits like they had during past debt limit increases.
Brian Riedl is a senior fellow at the Manhattan Institute. Follow him on Twitter @Brian_Riedl.